Denials still a major risk to revenue cycle departments, despite build-out

Hospitals wrote off 90 percent more denials than six years ago, The Advisory Board found, a difference of $3.5 million for a median 350-bed hospital.

Though hospitals and health systems have been improving important portions of their revenue cycle performance over the past two years, they continue to be dogged by elevated risks from increased denial writeoffs, bad debt and inefficiencies revealed by their persistently high costs to collect, according to Advisory Board's latest Revenue Cycle Survey.

A median 350-bed hospital, for example, would have lost $3.5 million to increased denial writeoffs from insurers over the past four years, the benchmarks show. Hospitals face reimbursement pressure, but also an acceleration of costs that has outpaced revenue growth.

The survey showed mixed results across several performance indicators -- for one, denials have been clawing back margins.

Hospitals wrote off as uncollectable 90 percent more denials than six years ago, a difference of $3.5 million for a median 350-bed hospital. The downstream picture also poses challenges: The median for successful denial appeals for hospitals fell from 56 to 45 percent for commercial payers over the past two years and from 51 to 41 percent for Medicaid.

For Medicare and Medicare Advantage, the rate of successful hospital appeals increased from 50 to 64 percent. These challenges are likely to persist as an increasing number of denials are based on medical necessity rather than technical or demographic error, the survey found.

Cash flow has been accelerating, but there are concerns there as well. In perhaps the best news for hospitals and health systems, median performance for net accounts receivable days improved by 8 percent from 2015 to 2017, and by 21 percent since 2006. But these gains may be partially due to writeoffs and other factors that could reduce accounts receivable while posing other challenges for the institution.

Hospitals in states with Medicaid expansion, meanwhile, produced better performance on bad debt, but the rise of high-deductible health plans has led to an increase in unpaid patient obligations across all states, regardless of whether the state had Medicaid expansion. This calls for an increased focus on patient collections, especially at the point of service, the survey found.

The median for collections at POS has risen from 0.24 percent of net patient revenue to 0.80 percent over the past six years. For a 350-bed hospital, this is equivalent to increasing collections from $800,000 to almost $3 million. Organizations that collect a higher percentage at POS tend to offer patient discounts for full payment upfront, resulting in a 90 percent increase in POS collections compared to organizations that do not.

The median cost to collect remained flat at 3 percent over the past four years -- which may seem like an accomplishment as overall hospital expenses grew by 7.5 percent in 2017, according to Moody's Investor Service. But costs to collect remain higher than historical benchmarks from six years prior.

And driving down these costs takes on greater importance given the softening hospital margin trends observed in the past 12 months. Despite significant consolidation across the industry in the past two years, many systems have yet to realize the advantage of "centralizable" revenue cycle functions, and are likely missing opportunities to drive down costs and capitalize on knowledge and information sharing across facilities.

The 2017 benchmarks indicate a reduction in centralization of revenue cycle functions revenue compared to the 2008 survey.

Given the combined complexity of these challenges -- and the widening range of responsibilities for chief financial officers -- the Advisory Board recommends health system financial executives consider delegating oversight of the revenue cycle to a vice president.

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